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We’ve posted the transcript for our webcast “Audit Quality: Lessons from BF Borgers and Other Recent Developments.” Deloitte’s William Calder, Maynard Nexsen’s Bob Dow, and Nonlinear Analytics’ Olga Usvyatsky discussed what corporate attorneys need to know about the latest audit-quality developments to advise their client(s) on financial reporting and corporate governance matters. Their discussion covered current challenges facing the accounting and auditing professions, an overview of recent PCAOB-related rulemaking, and lessons for public companies and audit committees.

Here’s a snippet from Bob’s discussion of the BF Borgers enforcement action and considerations for financial reporting teams and audit committees:

In the three years leading up to this enforcement action, in each year’s inspection report, [the PCAOB] indicated that there was a 100% error rate. In other words, 100% of the audits that they examined had significant deficiencies in the audit. . . . [also] this firm had, at one point, 300 public company clients, and they had a total of 10 CPAs on staff. They only had one audit partner that could sign opinions, and that was Mr. Borgers himself . . . This case is like a worst-case example, but we can take some general lessons from it.

One obvious lesson is that there’s a big risk when audit firms take on more work than they have the capacity and resources to handle. This is an extreme example, but I’ve seen other examples of firms that got in over their heads . . .

Another lesson has to do with the importance of firm culture . . . There was a lot of cooperation within the firm to basically do what have been referred to in some arenas as “scam audits,” where there’s really no audit being done at all. That’s a deep issue within the culture of the CPA firm. You’ve got to ask yourself about the professionalism of each of the staff members within the firm, not just Mr. Borgers, who was basically running this operation.

Another lesson is simply, as I mentioned earlier, the importance of quality control systems within the audit firm. Here, you had just a complete breakdown of their quality control systems, but it does show that it’s impossible to consistently have quality audits unless you have a good quality control system within the audit firm.

Finally, for public companies, we need to talk about the audit committee’s role . . . there was a lot of evidence out there even before this enforcement action came down – audit inspection reports indicated 100% of the audits were deficient – that there were issues with the BF Borgers audits. That’s a lesson for audit committees about doing due diligence. These audit inspection reports are available publicly on the PCAOB site. Any diligent audit committee should get a hold of those, and take a look at them, and ask questions if they have negative information in them . . . [And] there’s a lesson here for audit committees to not focus on only price and speed, but on quality when you’re fulfilling your fiduciary duty as an audit committee member.

Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.

– Meredith Ervine